The S&P 500 gained 0.4% to 1,885.08 today, while the Dow Jones Industrial Average ticked up 0.1% to 16,511.86. The Nasdaq Composite climbed 0.9% to 4,125.82 and the small-company Russell 2000 jumped 1% to 1,116.04. The 10-year Treasury yield rose to 2.536%.

JPMorgan’s Mislav Matejka and team argue that low yields are good for stocks:

We don’t think that the recent bond rally should be interpreted as a negative for equities. In the past the inversion in the yield curve was a useful leading indicator, but we don’t believe that this model is applicable currently, as short rates remain at extreme lows. The recent bond rally is clearly partly due to the loss of US growth momentum in Q1, but our fixed income strategists suggest that it was also due to expectations of a lower neutral Fed funds rate, declining duration
supply and subdued inflation.

While equity indices so far shrugged off the bond rally, within the market the Defensives have outperformed Cyclicals by more than 500bp in both the US and Europe ytd. We see similarities to 2013, where in the 1H bonds rallied and Defensives led, only for Cyclicals and Value to pick up in 2H. Last year it was the tapering that jump-started move up in yields, this time around it could be the reacceleration in global growth and/or action from ECB.

Goldman Sachs strategist David Kostin and team note that investors continue to look “below-the surface” as the S&P 500 continues its journey to nowhere.

Investors continue to search for below-the-surface opportunities as the S&P 500 meanders along near all-time high levels amid low volatility and support from corporate buybacks. Our weak balance sheet portfolio deserves attention given the 7% YTD absolute return – tops among our thematic baskets – and 600 bp of steady outperformance versus a basket of strong balance sheet stocks. We believe weak balance sheet firms will continue to lead based on history and our credit and the economic outlooks.

The biggest risk to continued weak balance sheet outperformance is tighter financial conditions. Our FCI has eased considerably in 2014 and steadily during the past two years. But our forecasts for only modest equity returns and credit spread tightening coupled with rising US Treasury yields implies conditions could tighten. However, the leveraged loan market tells the opposite story: first lien covenant-lite loans now account for 63% of issuance, up from 33% in 2012 and just 5% in 2010. Although S&P 500 leverage metrics remain strong, the recent trend has been higher with the debt/asset ratio rising by 100 bp to 27% in the past six months.

MKM Partners’ Jonathan Krinsky thinks we’ll find out which way the market is heading soon:

As the S&P 500 has bided its time without much of a correction over the last several weeks, it has also yet to see a clear breakout of its trading range (1850-1900). As a result of this consolidation, the Bollinger Bands on the SPX have become quite pinched…the width of the bands is now the narrowest they have been since late January (bottom panel). Generally, when the bands become so pinched, it is indicative that a period of expansion, or increased volatility lies ahead. Unfortunately this doesn’t predict direction, only that larger price swings are on the horizon.

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Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.